Buy-to-let can be a genuinely profitable venture, which is exactly why it attracts so many investors. But the way rental income is taxed puts a lot of people off before they even get started. This guide walks through why you pay tax on rental income, the rates involved, how to calculate what you owe, and the expenses and reliefs available to reduce your bill.
Do You Pay Tax on Rental Income?
Yes. Rental income is taxed through Income Tax, the same tax charged on income from employment.
You might see this referred to as landlord tax, property income tax, or buy-to-let tax, but these all describe the same thing – Income Tax charged on the money you make from renting out property.
Following the November 2025 Budget, it was announced that from April 2027, rental income will be taxed at rates separate from, and slightly higher than, standard Income Tax. The income thresholds will stay the same, but the rate applied to property income will differ from the rate applied to earnings.
What Other Taxes Do Landlords Pay?
Besides Income Tax on rental income, landlords typically deal with two other taxes: Stamp Duty Land Tax and Capital Gains Tax. Each applies at a different stage of ownership, not all at once.
- Stamp Duty is paid when you buy the property
- Capital Gains Tax is paid if and when you sell an investment property
- Income Tax is paid annually on the rental income the property generates
If you own the property through a limited company, you pay Corporation Tax on the rental profits instead of Income Tax – more on this below.
Note: the Financial Conduct Authority does not regulate some forms of buy-to-let mortgages.
What Counts as Rental Income?
Rental income covers any money you receive from tenants, including:
- Rent payments
- Charges for furniture usage
- Fees for services such as cleaning or gardening
- Charges for regular maintenance
- Heating charges
- Repair charges
- Hot water charges
- Lease bonuses or other non-refundable deposits
- Amounts kept from tenant deposit deductions or forfeits
How Is Rental Income Tax Calculated?
You’re taxed on your net rental income, meaning your profit as a landlord. This is worked out by totalling all rental income across your properties, then subtracting either the Property Allowance or your allowable expenses.
Rental Income Tax Rates
Your rental income tax is calculated using the same Income Tax bands and rates below.
| Income Tax Band | Taxable Income 2025/26 | Income Tax Rate 2025/26 | Property Income Tax Rate 2027/28 |
|---|---|---|---|
| Personal allowance | Up to £12,570 | 0% | 0% |
| Basic rate | £12,571 – £50,270 | 20% | 22% |
| Higher rate | £50,271 – £125,140 | 40% | 42% |
| Additional rate | Above £125,140 | 45% | 47% |
A few important points:
- Your Income Tax band determines your rental income tax rate, since rental income is added to your total taxable income and can push you into a higher band
- If your total income exceeds £100,000, your personal allowance reduces by £1 for every £2 earned above that threshold
- If your total income exceeds £125,140, your personal allowance disappears entirely, meaning all your income becomes taxable
Worked Example
Working out net rental profit:
- Salary: £40,000
- Rental income: £20,000
- Allowable expenses deducted: £5,000
- Net rental income: £15,000
- Total taxable income (salary + net rental income): £40,000 + £15,000 = £55,000, placing you in the higher rate band
Tax calculation for 2026/27:
- 0% on the first £12,570 = £0
- 20% on the next £37,700 (£12,570 – £50,270) = £7,540
- 40% on the remaining £4,730 above £50,270 = £1,892
- Total Income Tax, including tax on rental income: £9,432
Tax calculation for 2027/28 (once the new property income rates apply):
- 0% on the first £12,570 = £0
- 20% on the remaining salary above £12,570 (£27,430) = £5,486
- 22% on the portion of rental income between £12,570 and £50,270 (£10,270) = £2,259.40
- 42% on the remaining £4,730 of rental income above £50,270 = £1,986.60
- Total Income Tax on salary: £5,486
- Total Income Tax on property income: £4,246
- Total Income Tax overall: £9,732
How Does Rental Income Affect Your Tax Band?
Rental income is added to your other income to determine your overall Income Tax bracket. From April 2027, the rental portion of your income will be taxed at the slightly higher property income rates, but it will still count toward your overall bracket in the same way as before.
Tax on Rental Income, 2025 to 2027
- Income below £12,570: 0% tax on rental income
- Income between £12,570 and £50,270: 20% tax on rental income
- Income between £50,270 and £125,140: 40% tax on rental income
- Income over £125,140: 45% tax on rental income
Tax on Rental Income, 2027 to 2028
- Income below £12,570: 0% tax on personal and rental income
- Income between £12,570 and £50,270: 20% on personal income, 22% on rental income
- Income between £50,270 and £125,140: 40% on personal income, 42% on rental income
- Income over £125,140: 45% on personal income, 47% on rental income
Income Tax rates and thresholds are not changing in 2026. The change to property income rates takes effect from April 2027, when rental income moves from the standard 20/40/45 percent rates to the new 22/42/47 percent rates.
How Does Ownership Structure Affect the Tax You Pay?
How a property is owned changes how its rental income is taxed:
- Sole ownership – you pay Income Tax on the whole of the rental income
- Jointly-owned property – you pay Income Tax on your share of the income. If you own some properties solely and others jointly, all of it is treated as one rental business for tax purposes
- Jointly owned with a spouse or civil partner – you’re usually taxed as though you own equal shares, unless you can demonstrate to HMRC that the shares are unequal
- Owned through a limited company – the company pays Corporation Tax on the profits rather than you paying personal Income Tax
Can You Avoid Paying Tax on Rental Income?
Chasing ways to avoid landlord tax altogether isn’t a reliable strategy, and most tips along those lines carry more risk than benefit. A better approach is understanding which allowances genuinely apply to your situation and discussing tax efficiency with an accountant.
How to Reduce Tax on Rental Income
You can reduce what you owe through tax allowances, allowable expenses, and potentially a limited company ownership structure.
The Property Allowance
The first £1,000 of rental income each tax year is tax-free under the Property Allowance. If your gross rental income is £1,000 or less, you don’t need to report it or calculate expenses at all.
If your rental income goes over £1,000, you must declare it and choose between:
- Claiming the £1,000 Property Allowance, or
- Deducting your actual allowable expenses
You can’t claim both in the same tax year. The Property Allowance tends to work best when your actual expenses come to less than £1,000, since you get a larger tax-free amount that way.
Allowable Expenses
If your expenses exceed £1,000, claiming them individually is usually more tax-efficient than the Property Allowance. To qualify, expenses must relate exclusively to renting out the property and be paid by you as landlord, not the tenant.
Allowable expenses include:
- General maintenance and necessary repairs, though not improvements
- Replacement of certain domestic items
- Letting agent and management fees
- Accountant’s fees
- Insurance, such as landlord buildings, contents, and public liability policies
- Water rates, Council Tax, gas, and electricity where you cover these
- Legal fees for lets of a year or less
- Legal fees for renewing a lease under 50 years
- Direct costs such as business calls, stationery, and advertising
- Vehicle running costs relating to your rental business
What doesn’t qualify:
- Mortgage interest, which is instead covered by a separate tax credit (see below)
- Your full mortgage payment
- Home improvements, such as replacing carpet with wood flooring
- Personal or non-business phone calls
- Clothing and other personal expenses
Capital Allowances
Capital allowances let businesses claim relief on certain capital costs, such as equipment or machinery. For standard residential buy-to-let, these generally aren’t available. They can apply in more specific cases, such as furnished holiday lets or commercial property rental, covering things like fixtures, fittings, and equipment used in the property.
The Mortgage Interest Tax Credit
Mortgage interest can no longer be deducted from your taxable rental profit. Instead, you receive a tax credit worth 20 percent of your mortgage interest payments, deducted from your final Income Tax bill.
This replaced the previous system, where landlords could offset the full mortgage interest amount against rental income before working out tax owed, which reduced taxable income and could even keep some landlords in a lower tax bracket.
Limited Company Buy-to-Lets
Owning a buy-to-let through a limited company can be more tax-efficient for some landlords, since rental profits are taxed under Corporation Tax rather than personal Income Tax, and HMRC doesn’t factor in your personal income when setting the company’s rate.
Corporation Tax rates for 2025/26 and 2026/27:
- 19% on profits up to £50,000
- 25% on profits above £250,000
- Marginal Relief applies to profits between £50,000 and £250,000, giving an effective rate somewhere between 19 and 25 percent
Companies may also have more flexibility around allowable expenses, since the property is treated as a business asset rather than a personal investment. It’s worth speaking to a qualified accountant for advice specific to your situation.
Do You Pay Rental Income Tax If You Have a Mortgage?
Yes, having a buy-to-let mortgage doesn’t exempt you from Income Tax on rental income, though you do receive the 20 percent mortgage interest tax credit described above.
How Does the 20% Mortgage Interest Tax Credit Work?
- Calculate your taxable rental profit without deducting mortgage interest
- Pay Income Tax on the full rental profit at the applicable rate
- Receive a tax credit worth 20 percent of your mortgage interest costs, applied against your final Income Tax bill rather than against your taxable rental income
Worked Example (2026/27)
- Higher rate taxpayer (40 percent)
- Rental income: £30,000
- Mortgage interest: £10,000 (not deducted at this stage)
- Other allowable expenses: £5,000
- Taxable profit: £30,000 – £5,000 = £25,000
- Income Tax owed: 40% of £25,000 = £10,000
- Mortgage interest tax credit: 20% of £10,000 = £2,000
- Final Income Tax bill: £10,000 – £2,000 = £8,000
Do You Pay Tax If Rental Income Is Your Only Income?
Yes, rental income must be declared to HMRC and counts as part of your total taxable income, even if it’s your only source of income.
You won’t pay Income Tax if your total income, including rental income alone, falls below the personal allowance of £12,570. If it exceeds this, you’ll pay tax on the amount above the allowance. Allowable expenses such as letting agent fees, maintenance, and insurance can still reduce what you owe.
What About Income from Multiple Properties?
If you own several rental properties, their income is generally combined to work out your total taxable rental income. Expenses from one property can typically be offset against income from another.
- Keep detailed records for each individual property
- Aggregate all income and expenses to reach your total taxable amount
- Use your combined net profit or loss across all properties for tax purposes
Tax on Overseas Rental Property
Overseas rental income is broadly treated the same way as UK rental income. If you’re UK resident and domiciled, you’ll generally need to pay UK Income Tax on it. If you’re not a UK resident, even if temporarily in the UK, you won’t owe UK Income Tax on it if your permanent domicile is overseas.
You may also owe tax in the country where the property sits, potentially resulting in being taxed in both places. Foreign Tax Credit Relief may reduce this. Anyone with both UK and overseas rental property should get professional advice from a tax adviser or accountant.
Renting Out a Room in Your Own Home
The Rent a Room Scheme lets you earn up to £7,500 tax-free per year from renting out a furnished room in your main residence. If you split the income with someone else, such as a partner, the allowance is halved to £3,750 each.
Income above the threshold must be declared, and you can choose between deducting actual expenses or using the scheme’s tax-free allowance, whichever suits you better. The scheme only applies to a furnished room within your main home.
Renting to a Family Member
Yes, rent charged to a family member generally still counts as taxable rental income and must be reported via Self-Assessment, regardless of who the tenant is.
There’s some grey area if the payment is more of a contribution to bills or a token amount well below market rent, which HMRC may not treat as taxable. Anything closer to a formal, regular rent payment is safer to declare. When unsure, keep records and speak to an accountant or tax adviser.
Rental Losses
If your allowable expenses exceed your rental income, you’ve made a loss, which is common in the first year of letting due to upfront costs like refurbishment and letting agent fees.
- Losses can’t be offset against salary, dividends, or other income types
- Losses can be carried forward to reduce taxable rental profit in future years
- If you own several properties, a loss on one can offset profit on another within the same tax year
Do You Need to Declare Rental Income with No Profit?
Yes. HMRC’s interest is in your income, not just your profit. If your rental income exceeds £1,000 in a tax year, you must declare it even if allowable expenses have wiped out any profit.
If expenses exceed income, you likely won’t owe tax, but you still need to report the loss via Self-Assessment. That loss can then potentially be carried forward against future rental profit.
How to Pay Income Tax on Rental Income
What you need to do depends on how much rental income you receive:
- Under £1,000 a year – no need to report it, unless you’d rather claim expenses than the Property Allowance
- £1,000 to £2,500 a year – contact HMRC to check whether you need Self-Assessment or whether it can be collected through your tax code
- £2,500 to £9,999 after expenses, or over £10,000 before expenses – you must register with HMRC and file a Self-Assessment tax return
Self-Assessment for Landlords
HMRC uses Self-Assessment to collect Income Tax on income outside of salary, including rental income. You complete a return for each tax year, which runs from 6 April to 5 April the following year, and HMRC uses this to calculate what you owe. Keep receipts for any property work carried out, since you’ll need these to claim expenses.
There are two ways to handle Self-Assessment:
- Complete it yourself
- Use an accountant to complete it on your behalf
Doing It Yourself
Many landlords self-assess to avoid accountant fees. It still requires honesty and thoroughness. The general process involves:
- Registering for Self-Assessment
- Keeping accurate records of income and allowable expenses
- Completing the relevant sections of the return
- Reporting any other income sources
- Filing and paying by the relevant deadline
- Using online filing where possible to simplify things
Using an Accountant
An accountant reduces the risk of avoidable mistakes, since they know exactly how rental income is taxed, what can be claimed, and which records to keep. It’s generally worth using one with property taxation experience, particularly if you’re weighing up personal ownership against a limited company structure.
How to Calculate Rental Income Tax for Self-Assessment
- Calculate total income – add employment income, business income, and gross rental income together
- Deduct expenses or the Property Allowance – choose either the £1,000 allowance or your actual allowable expenses
- Work out net rental income – total rental income minus whichever deduction you chose
- Find your marginal tax band – add net rental income to your other taxable income and check the resulting band
- Apply the correct rate – each band of income is taxed only at its own rate, not the whole amount at one rate
- Apply the mortgage interest tax credit – deduct 20 percent of your mortgage interest from your total Income Tax bill
- Arrive at your final rental Income Tax bill
Record Keeping for Rental Income
Keep clear, accurate records, split by category where relevant, such as overseas versus UK properties, and furnished versus unfurnished lettings.
Keep supporting evidence such as rent books, receipts, invoices, bank statements, and mileage logs. Missing evidence can lead to a fine if HMRC queries your figures.
Tips for tracking expenses effectively:
- Use a dedicated bank account for rental income and expenses
- Use digital tools or accounting software to record and categorise expenses
- Keep receipts and documentation for repairs, maintenance, management fees, insurance, and other allowable costs
- Update records regularly rather than scrambling at filing time
- Speak to a tax professional to make sure you’re not missing any deductions
What Happens If You Don’t Pay Tax on Rental Income?
Undeclared rental income can lead to penalties, interest, and further investigation if HMRC suspects deliberate avoidance. Whether the omission is accidental or intentional, you remain responsible for accurate reporting. HMRC can go back several years, and penalties tend to increase the longer income has gone unpaid.
If you realise you’ve missed something, the Let Property Campaign allows landlords to voluntarily disclose unpaid tax, often with lower penalties than if HMRC discovers it first. Being upfront is almost always the better route.
How Does HMRC Find Out About Undeclared Rental Income?
HMRC draws on a wide range of data sources, including letting agents, Land Registry records, and online property platforms such as Airbnb or SpareRoom. Mortgage applications, Council Tax records, and unusual bank activity can also raise flags. HMRC also uses data-matching software and receives anonymous tips, so even informal or family lets carry a real risk of being discovered. Declaring rental income properly, or using the Let Property Campaign if you haven’t yet, is the safer route.
Other Taxes Landlords Should Be Aware Of
Income Tax on rent is only one part of the picture. Depending on your circumstances, you may also encounter:
Stamp Duty on Purchase
Buying a second home, holiday let, or buy-to-let means paying standard Stamp Duty rates plus a 5 percent surcharge on properties worth over £40,000, since the property isn’t your main residence. From 1 April 2025, the thresholds change, though the surcharge continues to apply on top of the standard rates. Scotland and Wales have their own separate systems, LBTT and LTT respectively.
| Property Value | Standard SDLT Rate (from 1/4/25) | SDLT Rate on Buy-to-Lets (from 1/4/25) |
|---|---|---|
| Up to £125,000 | 0% | 5% |
| £125,001 – £250,000 | 2% | 7% |
| £250,001 – £925,000 | 5% | 10% |
| £925,001 – £1,500,000 | 10% | 15% |
| From £1,500,001 | 12% | 17% |
Council Tax on Empty Property
Council Tax on a buy-to-let is usually the tenant’s responsibility, but you become liable if the property sits empty. This cost can be claimed as an expense on your Self-Assessment return.
Capital Gains Tax on Sale
Selling a rental property may trigger Capital Gains Tax on the profit. Key points:
- Calculate the gain by subtracting the purchase price from the sale price, then deduct allowable expenses (such as agency fees and improvements) and the CGT allowance to reach the taxable gain
- Check whether you qualify for any CGT reliefs or exemptions
- Report the sale and pay any tax due within the required timeframe
- Keep documentation covering the purchase, any improvements, and the eventual sale to support your figures